Reference: Employment Security Manual (ESM), Part V, Section 3670-3693, Field Audit Function (ETA Audit Policy); Core Revenue Quality Control, Operations Handbook. Background: The role of the field auditor in administering a compliance program under State UC laws requires a high degree of technical knowledge covering State and Federal employment taxes and acquired investigative skill. Depending on individual State approaches to auditor training, acquired knowledge and skills are often reflected in varying degrees of auditor productivity and inconsistent audit quality. The need for a broader approach to field auditor development, beyond their own State UC law and rules, has frequently been expressed by State UC tax managers at National and multi-Regional Tax Conferences and has also been recommended by Federal and State auditors. The variables in payroll control, employer-employee relationships and remuneration for individual services cannot be monitored efficiently unless the auditors' education includes background familiarity with the larger arena of Federal employment tax laws and the inter-relationship of similar but unique State UC tax programs. State UC Tax Field Auditor Training Program: A field auditor training program which focuses on issues beyond a single State's UC law and rules, is nearing completion. The program, developed under a cooperative agreement with the Indiana Department of Employment and Training Services (IDETS), will provide States a special supplement of broad based instruction that will complement existing State UC tax compliance training for UC field tax personnel. The training program will: (A) Provide State UC compliance staff with a working knowledge of the Federal Unemployment Tax Act and other related Federal employment tax applications; (B) explain ETA audit policy provisions and the Federal interest in UC audit performance; (C) encourage interstate cooperation in compliance efforts; (D) improve professionalism in audit performance and report integrity, and discuss Generally Accepted Auditing Standards (GAAS) and their application in payroll and tax compliance audit applications; and (E) raise the level of auditor awareness of outside influences on employment tax administration, through tax avoidance, employment practices and legislation. Development: Many State UC tax experts have participated in the program design and development. All States were surveyed for input as to their existing policy on field audit operations, auditor training programs and desired subject matter for supplemental training. A workshop comprised of experienced UC tax compliance experts from twenty-five States representing each of the ten ETA regions, reviewed options resulting from the survey and provided guidance on desired or needed training and audit program development. Design: The training program under development is structured to be folded into existing State training with an introduction to Federal employment tax law, ETA policy on UC auditing, meeting State quality control requirements and the inter-dependence of the States' UC tax programs. Subject matter will be broad based and include, but not be limited to: (A) The Federal Unemployment Tax Act (FUTA) and related employment tax provisions of the Internal Revenue Code and Social Security Act referred to in FUTA; (B) the inter-relationship of Federal and State roles in unemployment tax programs and the value of inter-State cooperation; (C) an explanation of Generally Accepted Auditing Standards to the extent they apply to payroll and the limited financial auditing practiced in UC tax compliance audits; (D) all elements of current ETA audit policy (ESM, Part V, Sections 3670-3693 (as revised) and the proposed Revenue Quality Control audit quality requirements; (E) working relationships often designed to circumvent standard employment classification tests; (F) examples and explanations of special provisions in Federal and State laws that either extend or restrict worker coverage and employer tax liability; (G) trainee introduction to the central office processes for which he/she provides support, such as, status, cashiering, employer accounting, delinquency/collections, computer services available to the auditor; and (H) instructions for setting up and closing out of an audit assignment. This includes making the appointment, the entrance interview, closeout interview, auditor's report and the central office review. The training program for State UC tax auditors will be in stand- alone modules that may be used, in the whole as a phase of, or to complement training for State tax staff, or in parts to supplement existing State training formats. As a complement to State training programs, the modules will focus primarily on expanding the trainees' knowledge of outside factors and audit approaches that contribute to the overall effectiveness of their State tax compliance programs. Each stand alone training module will have a trainee and a corresponding trainer section. The training modules package will consist of: (A) A supervisory executive summary to provide SESA management with a training program overview; (B) an instructor's manual that follows each module and training unit, with desired results to exercises and options available to auditors in coverage issues; (C) a student manual with text and exercises designed to carry a trainee step-by-step through each module; (D) video instruction to enhance trainee understanding of the subject matter; and (E) all texts and printed material on floppy disks in a flat ASCII format. Trainer and student manuals for each unit will include test exercises to familiarize trainees with application of the procedures and principles covered in that unit. These test exercises will help instructors measure trainee comprehension of the training material. All modules will contain transparency and flip chart masters for use in group training sessions. The complete training program package will be made available to each State in reproducible units. Program Delivery: Three Train-the-Trainer sessions have been scheduled for State staff who are responsible for auditor training and/or performance in their respective States. Such individuals should attend one of the three sessions that have been scheduled as follows: May 18-21, Atlanta, Georgia June 15-18, Denver, Colorado June 22-25, Indianapolis, Indiana The Indiana Agency and its contractor, The White River Training Company, will provide you directly with specifics on the training sessions. Hotel accommodations will be provided by the contractor. Trainers will be responsible for transportation, meals and other travel expenses. Attending a Train-the-Trainers session is essential to the success of the program because it will provide State trainers with specific knowledge and skills to deliver the program and guidance to develop related State-specific material for their auditor training programs. The Train-the-Trainers sessions will also enhance State trainers' knowledge of Federal and multi-State employment tax interface that they may not have exposure to in their own programs. Action Required: State Agency Administrators are requested to: (A) Provide the information in this Directive to their UC Directors and/or appropriate tax managers and training officers; (B) select individuals to be responsible for implementation and integration of the program into their auditor training program; and (C) assure that individuals who will be conducting the training attend one of the three train-the-trainer sessions.

References: UIPL 44-90 (September 21, 1990); Core Revenue Quality Control Operations Handbook (July 31, 1992). Background: Revenue QC is being developed in four separate modules: (1) Core, which assesses the quality of State Employment Security Agencies' (SESAs') internal tax processing operations; (2) Benefit Charging, covering how accurately employer chargeability is determined and charges are allocated; (3) Employer Compliance, which is to measure the accuracy of employers' contributions reports and completeness of payment of contributions due; and (4) Data Validation, to assess the accuracy of data obtained through required UI reports. The first two modules have been tested and the voluntary stage of RQC reflects the Core RQC test findings. Core RQC assesses how timely, accurately, and completely UI tax operations internal to the SESA are conducted. However, it is not concerned with the accuracy of the information tax units receive or how completely employers pay taxes due. The Employer Compliance (EC) module is intended to fill this gap. EC is intended to assess the accuracy of the information reported on contributions reports and the information on which States have made status determinations. This pilot project will test the feasibility of doing this by taking randomly-selected samples of employer accounts and auditing them according to ES manual standards. This sample of firms can also be used to estimate how much of contributions due were paid timely during the audit year, so that the results can be compared with what is obtained from the new RQC computed measure "The percent of amounts due that were paid timely." Although all SESAs routinely conduct employer audits, the employers are rarely selected in a way that permits the audit findings to be used to generalize about the behavior of all the State's subject employers. Some SESAs select employers at random but do not take the next step of analyzing the random results to make inferences about compliance rates. Both steps--random selection, and analysis of findings--are part of the EC module, and are the subject of this pilot. The basic design for the pilot was developed by Abt Associates, Inc., the current RQC technical support contractor, with input from an expert panel of UI tax administrators. Abt estimated that each pilot State would need to complete 1,600 "random" audits (actually, chosen using an efficient sampling design) to provide a sufficiently precise estimate of compliance. For comparison, it would be desirable to have another 400 audits chosen either from previous blocked claims or IRS 1099 leads, or both. The 2,000 (or 2,400) audits are to be done in a 12-month period, and all will refer to the same base year. All audits will be expected to meet RQC/ESM standards for quality. It is expected that a certain number of out-of-State employers will be selected; the design calls for them to be audited as well as in-State employers. The pilot is scheduled to begin in October 1993 and run for 12 months. More details on the pilot are provided in the attached paper. Objectives: This pilot is intended to assess the feasibility of including an Employer Compliance module in RQC. It will attempt to do this by (a) measuring the extent of incomplete or inaccurate reporting in the pilot States; (b) estimating the costs of conducting large-scale random audits, including the foregone audit yield and possibly lower compliance because of reductions in audits selected using the SESA's usual targeting methods; (c) providing better estimates of sample sizes needed for EC purposes; (d) noting the operational realities of periodically conducting this kind of large-scale research effort as part of a continuing field audit program, particularly in States with differing ADP capabilities; (e) determining whether data can be effectively put to use for audit selection and employer education; and (f) determining whether EC is the most cost-effective way to estimate non-compliance. (g) The sample will also be used to estimate the percentage of contributions due accrued during the audit year that was paid timely and (h) will be used to gather information on employee leasing companies and/or their clients, for future research by SESAs or UIS. Structure and Timing: The Department is seeking five States to implement the basic design developed by Abt Associates, Inc. Staff from the pilot States will be expected to help refine the design. Technical assistance in fine-tuning the design, providing training, and managing the pilot will be provided by a contractor (yet to be selected), who will also evaluate the results. Based on the responses to this solicitation, the Department expects to select participants by approximately June 1. The State pilot coordinators will meet with Federal staff and the pilot support contractor to refine the design and set interim deadlines and tasks, including training plans, later in June. Shortly thereafter, State ADP staff will be asked to meet with Federal and contractor staff to refine specifications for the sampling frame, sample selection, and retrieving data relevant to the pilot. The pilot is scheduled to begin in October 1993 and run for 12 months. Eligibility and Selection Criteria: It is assumed that most States with an interest in the pilot will have audit or field staff programs large enough that it will be feasible to conduct 1,600 random audits. States must be able to conduct audits meeting the new standards for quality and documentation. To meet this criterion, a State must have completed the RQC Field Audit Program Review (preferably as part of having implemented RQC voluntarily) and initiated any program improvements needed. If such has not been done by time of responding to this solicitation, the State must agree to do so by August and complete any needed program improvement by October. Each eligible State must provide a pilot coordinator who is willing to assist in the refinement of the basic design. If the number of volunteers permits, selection will emphasize diversity of participants with regard to geographical location, size, industrial mix, and degree of tax (especially audit) automation. Resources Provided for the Pilot: a. ADP Support. The pilot has many aspects amenable to or requiring automation: selecting the "random" component of firms to be audited; extracting data elements from the mainframe for the audit record; storing the auditor's data; tracking the progress of audits; analyzing results. The Department will provide software and/or specifications for many of these functions. In addition, each State will receive resources to defray the costs of programming/installing project software. b. Auditor Support. The Department will provide every pilot State with the equivalent of nine staff years over a three-year period to defray most of the additional staffing costs of conducting the pilot. c. Travel Funds for Out-of-State Audits. The Department will provide funds to defray the estimated costs of conducting out-of- State audits as part of the project. d. Technical Support. The Department will secure the services of a technical support contractor to assist with managing and then evaluating the pilot. Action Required: Interested SESAs are asked to communicate their desire to participate to Regional Offices by 45 days from the date of release of this UIPL.

Reference: ET Handbook No. 395 and UIPL 41-92 (August 3, 1992). Background: Since the start of the Quality Control (QC) Program, the Office of Quality Control has envisioned a change in the methods used to collect and verify QC data. The primary reason for this change is cost savings, which will be reallocated to fund other QC activities. Additionally, SESAs have long requested relief from the rigors of in-person verifications which resulted in excessive travel times and produced results which could be obtained using other, more cost effective methods. To measure the effectiveness of these other verification methods, a Telephone Pilot was conducted in four SESAs. The pilot findings indicated that telephone verifications were in fact, a viable option to the present BQC in-person methodology. Individual components of the QC investigation which could be conducted using other than the in-person method were identified. The Pilot results demonstrated that these components could be investigated using the telephone/FAX, and or mail with little or no loss in data quality. There were six design considerations developed that were applied in conjunction with the data generated by the Telephone Pilot to produce the alternative methodologies. The following provides a brief description of the six design considerations: (1) Data Quality. The BQC's credibility is based on the quality of its data. Use of alternatives to the in-person method of investigation which lessen the accuracy of its findings must be justified by considerable gains in other areas. (2) Cost Savings. One of the major appeals of alternative methods is their ability to increase the efficiency of BQC verifications. Cost savings was important and was appraised in conjunction with its impact on data quality. These cost savings had to be developed to specifically show the impact of savings versus loss in data quality. (3) State Flexibility. SESAs have long requested more flexibility in how they can routinely conduct BQC investigations. The use of telephone or mail was always available to the SESAs, but only in extenuating circumstances, and it was necessary to provide adequate justification when using these "other" methods. These alternative methods will allow SESAs more flexibility when conducting investigations. (4) Administration. This was a consideration because the Department must be capable of administering these changes equitably among SESAs. This means that the budgetary and policy implications of these changes must be comparable and consistent among SESAS. (5) Monitoring. Monitoring by both Regional and National Office (RO) (NO) staff is an integral part of maintaining QC data integrity. Where variations in the methodology to be applied for a particular investigative component exists, the Federal Monitor will be required to determine if the proper application of the methodology was utilized. It is preferable to minimize monitoring subjectivity and increase monitoring consistency when implementing the alternative methodologies. (6) Consistency in Methodology. Maintaining a consistent methodology throughout BQC is a primary consideration. This is so that any differences in BQC findings reflect the true rate of mispayments in the universe of State UI payments, and not the differences in how thoroughly BQC verifications are done. The above design considerations played an integral part when addressing the feasibility of applying the pilot results to the five QC investigative components. These investigative components are: (1) Claimant Interview, (2) Benefit Year/Base Period Wages, (3) Separation Information, (4) Work Search Verifications, and (5) Third Party and Other Verifications. After presenting these findings in several meetings throughout the year, and receiving input from both Regional and SESA QC staff, the Department is now moving towards implementation of these alternative methods. For each individual investigative component, Handbook No. 395 will be revised to indicate the primary and secondary method(s) to be used in the collection and verification of QC information. The Handbook will provide detailed instructions for each component, and the method(s) to be applied. The Department had anticipated implementing these changes in May 1993. However, any change to the QC investigative methodology requires approval from the Office of Management and Budget, and due to unforeseen delays, it is necessary to move the implementation date. Policy: SESAS are scheduled to begin implementation of the new alternative methods on all BQC cases effective July 5, 1993, which is the sample pull date for Batch 9327. This may also be applied to incomplete cases from previously selected batches. However, SESAs may choose to complete these unfinished cases using the "old" in-person method, at their discretion. The investigative components that will be mostly impacted by the new methodology are: Work Search Contact Interviews, Employer Interviews, and Third Party Verifications. A draft copy of Chapter VI, which explains the methodology changes in detail, is provided as an attachment (See Attachment A). There were basically no changes to the in-person method used for the Claimant Interview. The Claimant Interview anchors the BQC investigation, and is the major detection point for a number of overpayments and underpayments of all types. Additionally, the Pilot indicated that there was a considerable loss in data quality when using other than the in-person method for conducting the Claimant Interview. There were major changes to the Work Search Verification methodology. Work Search verifications must continue to be conducted in-person, with a number of "sanctioned exceptions". The in-person method remains the "primary" method of verification for this investigative component. This was necessary for several reasons including a loss in data quality, difficulty in administering and monitoring, and the overall inconsistencies among SESAs that would be exhibited by permitting SESA flexibility for Work Search Verifications. For a detailed listing of the "sanctioned exceptions", see Attachment A, (Work Search Contact Interviews, item No. 7). A number of "exceptions" were also rejected, due primarily to their inability to satisfy certain design considerations. The primary method for conducting Employer Interviews is now the use of telephone/FAX. See Attachment A, (Employer Interviews, item No. 8).The primary method for conducting Third Party verifications is now by use of telephone/FAX. See Attachment A, (Third Party Verifications, item No. 9). Resource Allocations: Due to the launching of Revenue Quality Control, a number of BQC positions have been reallocated effective May 10, 1993. The reallocation of the BQC positions means that SESAs' weekly sample size will be adjusted beginning with Batch 9319 which has a sample pull date of May 10, 1993, and again beginning July 5, 1993, the sample pull date for Batch 9327 and the effective date of alternative methods. (See sample adjustment chart, Attachment B). Additionally, SESAs currently conducting Program Improvement (PI) studies are to make the sample adjustments and continue their PI studies, while ensuring that minimum sampling requirements are met. SESAs that may need an extension of their current PI study should follow the procedures in UIPL 37-91. Procedures: SESAs should begin preparation for implementing alternative methods on July 5, 1993. These preparations include, but are not limited to, revisions to the State QC Procedures Operations Handbook, staffing adjustments, forms development, etc. Action Required: SESA Administrators are requested to provide this information to appropriate staff.

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Reference: None. Background: RQC is a comprehensive measurement system designed to assist State and Federal Administrators in assessing and improving their Unemployment Insurance (UI) tax operations. The design has been crafted through a cooperative effort between the Department of Labor's National Office staff, Regional Office staff, SESA staff working with the National Office on temporary Intergovernmental Personnel Act (IPA) assignments, and SESA staff serving in advisory capacities (expert panel). To date, staff from eleven different SESAs have served on IPA assignments. With the approaching expiration of the terms for the current IPAs, several openings will become available. Current Status of RQC: RQC encompasses all major dimensions of quality: accuracy, timeliness, and completeness. The system has been divided into three "modules": a. Core RQC. Voluntary implementation of this module is scheduled in 49 States in 1993. Core RQC assesses SESA tax operations through computed measures obtained by required reporting of data, Program Reviews, and Surveys. Computed Measures are similar to the tax indicators from ETA 581 Reports currently used with Desired Levels of Achievement (DLAs). The Program Review is further divided into Systems Reviews and Acceptance Samples. Systems Reviews examine tax processes for the existence of internal controls. Acceptance Samples examine small numbers of transactions to verify the effectiveness of the internal controls. Surveys gather information on methods and procedures for the purpose of identifying successful operations and sharing information amongst the SESAs. b. Benefit Charging Accuracy. This module involves two steps: (1) assessing the accuracy of the decisions to charge or non- charge base period employers, and (2) assessing the accuracy of the allocations of benefit charges to employers and/or general pool accounts. Pilot testing has been completed in six SESAs, and the results are being reported to all SESAs with a request for their comments. c. Employer Compliance. This module, which is in the developmental stage, is an attempt to produce a single measure for the dollar impact of employers' tax compliance (or noncompliance) through two components: compliance with tax reporting and compliance with paying contributions due. SESA volunteers are being solicited for a fiscal year 1994 pilot test. State Nomination of Staff to Provide Technical Support in the Development of RQC: The contractual assignments for our present team of IPAs are drawing to a close; therefore, the services of new SESA tax staff will be needed. The RQC Workgroup is seeking individuals with knowledge and experience in SESA tax operations, with knowledge of automation in tax operations, and with good writing and analytical skills who can apply this expertise on a broad scope. SESA tax staff are being recruited to work in Washington, DC on 1 to l l/2 year assignments, beginning approximately August 1, 1993. These staff will participate with the RQC Workgroup in assignments from among the following: -- Implementation of Core RQC in the SESAs, -- Development of the Modules for Employer Compliance and Benefit Charging, and -- Development of ADP interfaces. A person serving on an IPA assignment with RQC remains a State employee, continuing to draw normal salary and benefits. Direction and control are provided by Federal staff. Salary and relocation/per diem expenses may be paid by the SESA, the Department of Labor, or shared, depending on arrangements negotiated between the SESA and the Department. IPAs are entitled to either (1) the reasonable cost of relocation to and from Washington, DC; or (2) the reasonable cost of living expenses (per diem) while working in Washington, DC. Action Required: SESA Administrators are requested to notify appropriate staff of opportunities for IPA assignments and to forward resumes/applications of interested applicants to the Regional Office within 30 days of this UIPL. The resume/application should show work history (including duties), name and phone number of the applicant's supervisor, and the applicant's phone number.

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Background: An analysis of results from a survey of companies that provide payroll and/or tax filing services or that sell payroll software has lead to the conclusion that these companies do not have all the information necessary from State QCR forms, or within "Employer's Handbooks" provided by States, to be able to provide data which conforms to the State definition of monthly employment. This results in inaccurate data being submitted. Recommendation: This data is of vital importance in a number of national statistics and is used widely by the Bureau of Labor Statistics, the Department of Commerce and the Unemployment Insurance Service. Therefore, it is recommended that States add a statement such as the following to their QCR: "The monthly employment data reported on line item should be a count of all full-time and part-time workers in covered employment (subject to this State's Unemployment Compensation Law) who performed services during the payroll period which includes the 12th of the month. If no employment in the payroll period, enter zero." Further, it is recommended that this statement and more detailed information on monthly employment be included in the State's "Employer's Handbook". Action Required: State Administrators should share this information with appropriate staff. State administrators might consider forwarding inquiries on the issue to the State Labor Market Information units which should be able to respond.